Overview

The National Association of Insurance Commissioners (NAIC) is proposing enhancements to reserve adequacy requirements for life insurance companies by implementing a new actuarial guideline (AG ReAAT). This guideline addresses a need identified by some regulators to better understand the amount of reserves and type of assets supporting long duration insurance business that relies substantially on asset returns, particularly those related to reinsurance transactions that materially lower the amount of aggregate reserves held before and after reinsurance.

AG ReAAT aims to ensure that asset adequacy testing (AAT) incorporates a cash flow testing (CFT) methodology that evaluates a ceded business as an integral component of asset intensive business. The guideline is currently in development, with the NAIC holding periodic consultations with interested parties, so its provisions could change before it goes into effect. The final exposure is expected in May 2025 with continued review throughout the summer and projected finalization by August 2025.

Effective date and scope

The guideline will be effective for the AAT developed for the December 31, 2025 Annual Statement and for all subsequent annual statements. The requirements are expected to be incorporated into the NAIC Valuation Manual (VM-30) at a future date.

AG ReAAT will apply to all life insurers with asset intensive reinsurance transactions ceded to entities that are not required to submit a VM-30 memorandum to U.S. regulators and:

• For treaties established on or after January 1, 2016 (or January 1, 2020 for certain non-affiliated party treaties) that meet specific criteria determined by the counterparty and based on reserve credit amounts and the proportion of such reinsurance on cedants’ gross reserves, or
• For transactions that result in a significant reinsurance collectability risk. For year-end 2025, such risk is as determined by the ceding company’s appointed actuary.

The current draft of AG ReAAT defines asset intensive reinsurance transactions as “[c]oinsurance arrangements involving life insurance products that transfer significant, inherent investment risk including credit quality, reinvestment, or disintermediation risk as determined by Appendix A-791 of the Life and Health Reinsurance Agreements Model Regulation.”

Asset adequacy assessment

Asset adequacy method

AG ReAAT establishes that as risk increases, the ceding company’s appointed actuary should perform more rigorous and frequent analysis and documentation. Some relevant risks are a) a VM-30 actuarial memorandum not being provided by the assuming company to a U.S. regulator, b) a significant overall reserve decrease in relation to the pre-reinsurance reserve, c) a significant use of non-Primary Security (as defined in Section 4.D. of Actuarial Guideline 48) to support reserves, and d) a significant collectability risk associated with the reinsurer. However, to the extent that there are risk mitigants such as the existence of trusts or funds withheld, they may be considered.

CFT analysis is expected for all in scope treaties unless exceptions are granted. For lower risk treaties, appointed actuaries should consider other asset adequacy techniques provided in Actuarial Standard of Practice No. 22 and relevant actuarial guidelines (e.g., Actuarial Guideline 53) as well as performing an attribution analysis (which also might ultimately be required for CFT business), which creates a thoroughly documented walkthrough of the reserve decrease from the pre-reinsurance reserve to the post-reinsurance total reserve attributable to various factors.

Post-reinsurance reserve and starting assets

AG ReAAT defines post-reinsurance reserves as “[f]ollowing a reinsurance transaction, the amount of reserves held by the ceding company plus the amount of reserves held by the assuming company minus the amount of reserves held by the assuming company supported with assets other than Primary Security.” While a mandatory CFT analysis that uses the starting assets equal to the post-reinsurance reserve will be conducted, there may be opportunities for alternative runs with higher starting asset amounts. The draft guideline provides some examples and notes that “[t]he Appointed Actuary should provide justification in their documentation about the appropriateness of the Starting Asset Amount in the Alternative Run.”

If the cedant knows the actual assets supporting the starting assets, those assets should be modeled. Otherwise, reasonably conservative estimates are expected.

Possible CFT exemptions

In certain circumstances, it may be permissible to substitute an alternative analysis for CFT.

For year-end 2025 submissions, exemptions may be provided by the domestic regulator for lower-risk treaties if attribution analysis of any reserve decrease is contained in the submission and the pre-reinsurance reserve associated with all counterparties within a group is less than $5 billion. Such exemptions may be contemplated if all the following conditions did not exist after December 31, 2014: (1) an entity that otherwise meets the NAIC Model Act 440 definition of an Affiliate or meets the NAIC classification as a related party, (2) for which greater than 25% of the assuming reinsurer’s reserves have been assumed from the ceding company or entities in the same group as the ceding company, and (3) an entity that has 1% or higher ownership of the assuming company.

If a memorandum similar to VM-30 is available and the ceding company’s regulator can use it to determine asset adequacy, it may be a practical alternative to CFT analysis.

For a business being valued under principle-based reserving (PBR), documentation of the pre-reinsurance PBR reserve is appropriate in lieu of separate CFT for the purposes of this guideline. The pre-reinsurance PBR reserve would then be compared to the post-reinsurance reserve as defined by this guideline to determine whether there is a deficiency or sufficiency for the block of business.

Disclosure

For year-end 2025, the appointed actuary should consider the analysis required to be performed by AG ReAAT, along with other relevant information and analyses, in forming their opinion regarding the potential need for additional reserves. AG ReAAT currently does not prescribe guidance as to whether additional reserves should or should not be held. If the appointed actuary believes additional reserves are required, they should reflect that assessment in the Actuarial Opinion. In any case, the domestic regulator will continue to have the authority to require additional reserves.

Future refinements

The issues the NAIC plans to consider later include, but are not limited to, treaty size threshold refinement, aggregation and covered agreement issues, additional alternative run examples, attribution analysis role, and Primary Security definition refinement. Some of these refinements may be reflected after August 2025.

Steps for cedants to consider now

We plan to send out papers throughout the year to keep you informed about the progress and implementation of AG ReAAT, including reporting requirements and attribution analysis details. Our goal is to ensure you have the necessary information and support to comply with the new requirements effectively.

If you have any questions about the content of this report, the authors can be reached at [email protected] or [email protected].